DEFINITION of ‘Convenience Fee’
A charge assessed by a payee when a consumer pays with a credit card rather than by check or Automated Clearing House (ACH) transfer. Convenience fees can be a fixed dollar amount or a percentage of the transaction amount (usually 2% to 3%) and must be disclosed to the consumer in advance. Types of payments where the payee typically charges a convenience fee include mortgage payments, property tax payments, college tuition and taxes.
BREAKING DOWN ‘Convenience Fee’
Suppose you want to pay the IRS by credit card. The IRS will accept credit card payments through several different payment processing companies, and they all charge convenience fees. One might charge 1.88% with a $2.75 minimum, while another might charge 2.35% with a $3.50 minimum. Thus, if you need to send the IRS $2,000 and you wanted to pay by credit card, you’d pay a convenience fee of 0.0188 × $2,000 = $37.60. If, for some reason, you only wanted to send the IRS $2.00 via credit card, you would pay the minimum convenience fee of $2.75 instead of 1.88%.
Some people might not mind paying this convenience fee if doing so will allow them to meet the minimum spending requirement to earn a credit card sign-up bonus. Other people might be willing to pay a convenience fee to keep an important account current when they don’t have enough money in their checking account to cover the expense; the consequences of carrying a credit card balance are generally less severe than the consequences of not paying your taxes, for example.
In most situations, it is best to avoid spending money on convenience fees. Even if you have a cash back credit card, it probably doesn’t offer a higher cash back percentage than the convenience fee percentage, so you won’t come out ahead.
Credit card convenience fees are not the same as credit card surcharges, which are the charges some merchants impose on consumers who pay with credit instead of cash. Both convenience fees and surcharges serve the same purpose, which is to discourage consumers from paying by credit card and to offset the fees that credit card companies charge payees to process credit card payments. Surcharges are banned in 10 states, including California and New York. In states that allow them, vendors must disclose them up front and must not charge more than 4% of the transaction amount.